Dr. Kohl Quarterly Articles

What is stressing agricultural lending portfolios?

In several recent webcasts and lender schools, the pulse of agricultural economics is easy to find; stressed. Of course, conditions and challenges vary depending on the location of the lender: Midwest, Southern or Coastal.

In the latest surveys, lenders were asked what factors were creating financial stress in their portfolios.The number one cause, regardless of geographical region was negative profits and cash flow. As expected, some levels of loss are more challenging than others.Several accounts have experienced negative numbers for three of the past four years. For others, profits have been sporadic, and dependent on weather conditions, type of enterprise, and geographic region. Of the larger farm businesses, some are experiencing six to seven figure losses. And many smaller farms have thus far been able to overcome negative numbers using off farm income, refinancing, and excess land equity.

Lenders from the Midwest region indicated that family living expense was the second largest issue impacting the financial viability of their portfolio. In comparison, family living expense was the number three factor for Coastal lenders. Of course, living expense doubled during the economic supercycle, and while budgets are tightening, this category has a direct correlation to cash flow viability. According to farm record data, today’s family living cost has adjusted approximately 20 percent since the recent supercycle.

In the Midwest, the decline of land values was the third ranking factor currently stressing agricultural lending portfolios, yet this issue was at the bottom of the list for Coastal portfolios. Land values are the underpinning behind collateral and equity on the balance sheet. When cash flow and profits fail, and liquidity is gone, the final option is collateral.

Another issue indirectly stressing portfolios is the exit trend of many of the more experienced lending staff. As some demographers have called it, “the grey tsunami” refers to the loss of baby boomers from the workplace, which comes at an economically critical time for agriculture. Losing the institutional memory from the 1980s farm crisis and other down cycles is one of the foremost subjects in today’s board rooms and management meetings. It is also a major variable for producers as they struggle to return to profitability, and may not be able to continue with the lender they know and trust.

P.S. In one survey of Midwest lenders, 84 percent indicated land values have declined 0 to 10 percent, while 22 percent of lenders believed values would decline more than 10 percent. In sharp contrast, only 13 percent of Coastal and Southern agricultural lenders indicated land values have declined 0 to 10 percent. This perspective is reminiscent of the1980s.